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How to finance your business the non-Dragons’ Den way

October 8, 2011

While it might be highly entertaining television and gets people talking about business, Dragons’ Den does annoy us here at Bytestart!

We are small business owners ourselves, and it really bugs us to watch people happily give away huge chunks of their start-up business in return for relatively small amounts of money.

Getting £50,000 of funding from an investor may sound like a dream come true. But the reality is that you will burn through that cash really quickly (cash in the bank tends to get spent faster than cash you have to earn), and when it’s gone, you still have someone else who owns a significant part of your business.

Having someone else on board slows business down. It’s a significantly different situation than when you have full control over what your business does. You can’t change strategy or chase opportunities overnight, because someone else has a say in what the business does.

Worse than that, an investor who owns 49 per cent of your business is entitled to 49 per cent of the profits. And you can forget the notion that they will do 49 per cent of the hard work!

The Dragons’ Den style of funding where investors sink money into a venture in the hope they will either take significant dividends in the years to come, or will be able to sell their share for a lot more than they paid for it, is known as venture capital.

When the investors are individuals, they are also known as Business Angels.

Taking an investor’s money is one of several ways to fund your business. Here are our favourite five:

Use your savings

Without a doubt the best way to start a business is with your own money. Not only does this ensure you stay in complete control of your business, but it has a curious effect on the way you spend money.

When you know there is a finite pot of cash that you have already worked hard to earn, you tend to be a lot more careful how you spend it. It’s not about being tight; it’s about making sure that every pound spent works hard to contribute towards the business.

Putting your savings into your business has the added bonus of making it easy for you to take money back out of the business in the future, especially if you run a limited company.

Get a bank loan or use credit cards

You will find it virtually impossible to get a business loan for a new venture these days, so if you do need to borrow money you will probably have to get a personal loan or borrow on credit cards.

Borrowing money in this way has its advantages. You don’t have to hand over a share of your business so you maintain complete control. It’s like borrowing cash to buy a car… you borrow money and pay it back in instalments.

There is a big downside though. Any loan must be repaid. And if you borrow cash to fund a business that doesn’t work, you will be lumbered with personal debt that might even be secured on your home.

It can be a risky strategy, so ensure you understand the potential downsides and financial risk before you do this.

Get a grant

There are hundreds and hundreds of grants out there, and to get your hands on the cash, all you have to do is show that you or your business qualifies, and demonstrate how the grant would make a significant difference in some way. Grantsnet is a great place to start.

Get investment from family, friends or fools

How is this different to a Dragons’ Den-style investment? Simple. You can borrow money from family, friends or fools (non-professional investors) without having to give them a share of your business.

This means you get funding but you maintain control. However be aware that if your business doesn’t go to plan, you will find that relationships quickly sour.

Aunty Ethel may be keen to sink her life savings into your new business idea right now, but when she needs the money back next year to get her bathroom replaced and you’ve spent it all with nothing to show for it, that’s going to be a difficult conversation to have!

If you borrow from people you know use a solicitor to draw up a legal agreement. It may prevent serious disagreements in the future.

Finance as you go along

If your business starts generating cash quickly, then you can finance future growth as you go along. One smart way to do this is with something called factoring.

This pays you a large percentage, usually around 90%, of every invoice you issue virtually straight away, making cash flow easier and allowing you to “borrow” against work you are doing right now.

If your business is winning bigger and bigger orders this can be a smart way to release the cash to fulfil those orders.